Incident: Ruiling Co., Ltd. released its quarterly report, achieving operating income of 193 million yuan, a year-on-year increase of 23.62%, profit of 36.157 million yuan, a simultaneous increase of 39.21%; net profit attributable to common shareholders of listed companies was 306.947 million yuan, up 36.37% from the same period last year. Better than the market! Comment: 1. 2013 Annual Report Review: Proposing the Development Direction of Automated Welding Annual Report Review: In 2013, it achieved main business revenue of 680 million yuan, down 9.85% from the same period last year; net profit attributable to common shareholders of listed companies was 93.54 million yuan, an increase of 12.35% over the same period last year. As overall demand in the domestic welding and cutting industry continues to decline and competition intensifies, product sales fell 7.25% and inventory volume increased 17% in 2013. However, the cash flow from operating activities was good. The net operating cash flow in 2013 was 170 million yuan, an increase of 2.42 times over the previous year. The share of foreign sales revenue increased steadily, to 34.33% in 2013, and the main business profit accounted for 35.34%. As the company launched new products, gross margin remained stable. Two technological innovations, “digital CO2 pulse arc technology” and “dynamic three-arc double wire welding”, were completed in 2013. Due to the launch of new products, the annual report suggests that “welding users' demand for automated welding equipment will continue to expand, and automation and efficient welding will become the main direction of the next step in welding innovation.” The company strengthened management, and expenses fell sharply. In 2013, the company's sales expenses fell by 39% and management expenses fell by 2%, so the increase in net profit was better than revenue. The revenue of the new Kunshan base (Kunshan Ruiling Welding Technology Co., Ltd.) has not yet reached scale, and net profit is 2.73 million yuan. 2. Benefiting from the growth of new products, the increase in revenue and gross margin in the first quarter was the main reason why the performance exceeded expectations. The welding equipment industry was affected by the downturn in the world economy and the slowdown in domestic economic growth. In 2013, the downstream sector of the welding and cutting equipment industry continued to decline since the second half of 2012, and domestic market demand continued to shrink. However, the company has once again achieved new results in the development of new technology, focusing on completing two technological innovations: “digital CO2 pulse arc leading technology” and “dynamic three-arc double wire welding.” “Digital CO2 pulse arc induction technology” is mainly used in the company's third-generation welding machine products. The application of this technology makes the welding response faster, the process more stable, less likely to break the arc, and less splash, reaching the advanced level of similar products in China. “Dynamic three arc double wire welding” technology is a new type of double wire arc welding technology. It has achieved a leap through leaps and bounds on the “high melting rate and low heat input double wire double arc welding” technology developed by the company in collaboration with Harbin Institute of Technology last year. Using dynamic three-arc double wire welding technology, it will better solve the automation technology problem of high-strength steel thick plate welding at one time. Currently, this technology is internationally leading innovative and efficient welding technology. In the future, it will be widely used in the fields of thick plate structural components such as military industry, ships, metallurgy, and pressure vessels. By the end of last year, the company had obtained a total of 11 invention patents, 59 utility model patents, 58 design patents, and 37 computer software copyrights. Another 32 patents and computer software copyrights are being applied for. Benefiting from new products and management improvements, Ruiling's gross margin increased by 2 percentage points in the first quarter, the management expense ratio decreased by 1.3 percentage points, and net profit increased by 36 percent. Of course, the low base in the first quarter of last year was also one of the reasons. 3. The subsidiary fulfilled its acquisition performance promise and compensation, and Ruiling received another 15% of the shares in Zhuhai. The subsidiary, Zhuhai Gude, has not met its performance promises, and the company will receive compensation of 16.6 million yuan by purchasing another 15% of the shares at a price of 1 yuan, as well as compensation for future cash dividends. The main business of Zhuhai Gude is the integration of automated robot welding systems and the development and manufacture of automated welding process equipment. Its products cover fields such as construction machinery, coal machines, automobiles, steel structures, etc. Among them, the revenue contribution of construction machinery customers was as high as 50%. In 2012 and 2013, Zhuhai Gude lost 3.06 million yuan and 3.24 million yuan. However, the welding automation business is one of the company's strategic development directions. Through capital increases, the integration and management of Gude has been increased, and transformation has been accelerated, which is beneficial to Ruiling. 4. Establishing a welding industry fund to expand the welding industry chain. Mergers and acquisitions of industry funds are also an innovation. In 2014, the company established a welding industry fund: The company and Shenzhen Xinxin Zhongcheng Investment Co., Ltd. signed a “Strategic Cooperation Investment Intent Agreement” on March 23, 2014. The two parties will jointly initiate the establishment of Shenzhen Ruiling Huixin Welding Industry Fund Management Co., Ltd., with a registered capital of 10 million yuan, of which Ruiling Co., Ltd. invested 4.9 million yuan and held 49% of the shares; Xinxin Zhongcheng invested 5.1 million yuan and held 51% of the shares. In the future, the company will jointly initiate the establishment of a number of mergers and acquisitions funds. The size of the initial M&A fund will not exceed 300 million yuan; Ruiling Qixin will invest 6 million yuan in the M&A fund as a general partner; and the company will invest no more than 30 million yuan as a limited partner. The investment direction of the M&A fund is mainly in enterprise projects in the welding industry and related fields. We believe that mergers and acquisitions of industrial funds are an innovation. On the one hand, under the conditions of Huixin Zhongcheng's industrial investment experience, mergers and acquisitions of enterprises in the same industry or upstream and downstream of the industrial chain will enhance and consolidate the company's leading position in the industry. On the other hand, this mode of operation of M&A funds reduces the direct acquisition risk of listed companies, so they can continue to increase their holdings after the acquisition target matures. 5. The valuation was significantly lower than that of automation equipment companies, and for the first time, it was given a highly recommended rating. We expect 2014-2016 EPS to be 0.52, 0.63, and 0.76 yuan, with a compound growth rate of 20-25%, and dynamic PE 21 times in 2014. It is worth mentioning that the company currently has a market value of 2.5 billion yuan and monetary capital of 1 billion yuan. If 800 million yuan of idle capital is deducted, dynamic PE is less than 15 times and PB 1.14 times. The company has good cash flow, a steady business style, and its current market value is underestimated. After the correction, it is recommended to pay active attention. 6. Risk factors: raw material prices are rising, investment growth is slowing down, and executive holdings are declining.